The Case for Raw Commodity Sector Bottoming in 2016

(Kitco News) - Let’s take a look at a few longer-term charts of key markets and indexes, which are presently providing some technical clues the major “bust” cycle in the raw commodity sector will likely run its course in 2016.

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Goldman Sachs Commodity Index: The GSCI monthly chart shows the index price this month dropped below the 2009 low and hit a 12-year low. The raw commodity sector is presently experiencing its second-largest bust cycle dating back at least 40 years—second only to the big downdraft seen in 2008 and 2009.

The impact of this major bust in raw commodity markets is widespread and has just recently come to include a big sell-off in world stock markets. There are increasing worries about problematic price deflation gripping world economies, which in a worst-case scenario could push those economies into depression. I’m not in the doomsday camp. My bias is that during 2016 (and likely in the first half of the year) the raw commodity sector, as seen by the GSCI, will bottom out and at least start to trade sideways.

One element of my reasoning is the present extreme bearish raw commodity attitudes that seem to be pervasive in the marketplace, and most pronounced in crude oil and gold. When attitudes get so extremely bearish, it’s a good clue that the downturn is close to ending.

See on the monthly chart for the GSCI that prices are presently in a steep downdraft that has pushed the Relative Strength Index (RSI) well into oversold territory (below 30.0). The present posture of the RSI hints that the indicator could be setting up to produce a bullish double-bottom reversal pattern. Yes, classic chart patterns can even be applied to technical studies, themselves.

The posture of the RSI on the monthly GSCI chart is another clue that the raw commodity sector is close to bottoming. What this means is that present prices in many raw commodities are likely long-term value-buying opportunities. Here are the main commodities that come to mind for me, when thinking about value buys at present: precious metals, grains, coffee, sugar, natural gas, crude oil, cotton and lumber.